Article Written By:
Kolbe Wolfe
Financial Analyst
The trade name and trademark of a company are oftentimes its most recognizable assets. Indeed, it’s oftentimes hard to imagine a McDonald’s without the golden arches, a Nike without the “swoosh,” or Apple without, well, an apple. Trade names and trademarks can have far-reaching effects and can be a determining factor of income to your business.
How to Approach What a Trademark Is
A trademark is essentially the “name” of the company or product, and without your name on the product, you’re unlikely to get recognized for your efforts, much like the exams we all took in high school and college. While the actual company name may be one thing, consumers tend to think of the brand, trade name, or trademark as the name for both the product and the company. A good example of this is Kleenex, which is a brand of products under the Kimberly-Clark Corporation.
How to Determine the Value of a Trademark
Trademarks and trade names are oftentimes valued through the “Relief from Royalty” method. Under this method, the following steps are performed:
- We ascribe a certain percentage of projected sales are attributable to the trade name and/or trademark of the company. This is generally applied to sales over an extended amount of time (generally between 20 years and indefinitely).
- We assume a royalty rate based on comparable royalty rates observed across the industry, and apply that to the sales that are attributable to the trade name. This results in a theoretical royalty (typically expressed as a percentage of gross sales) that the company is avoiding by owning its trademark rather than licensing it from another company (i.e., the company’s “relief” from this royalty payment).
- The “economic depreciation rate” is determined and applied to these theoretical royalties. The economic depreciation rate demonstrates the tradename losing value over time, due to either the slow removal of the trade name or a replacement trademark overtaking the old one.
- After accounting for economic depreciation, we apply a tax rate to these theoretical royalties to ascertain cash flows from the asset. These cash flows are then discounted back to present value using a rate of return an investor would require to invest in the trademark.
When You Need to Value a Trademark or Trade Name
Generally according to U.S. GAAP, the costs associated with creating trade names and trademarks are expensed, and therefore will not appear on a balance sheet of the founding company. However, when an acquisition takes place, a trademark or trade name is, per the language of ASC 805, a “separable” (in that you could separate the asset from the business contractually through a purchase or sale) and “identifiable” (in that the asset is clearly defined) intangible asset, and therefore must be reported on the acquirer’s books at fair value. Prior to completion of an acquisition, an acquirer may be interested in what the value of the trademarks he or she will receive upon closing are worth, and incorporate that amount into the deal. Another potential time one would need to value their trademark or trade name would be if the asset was transferred, or otherwise needed to be reported for tax purposes.
This is where it is vital to have an impartial and knowledgeable third-party evaluator determine the value of these and other intangible assets to properly report your balance sheet in compliance with U.S. GAAP.
